What Out-of-State Buyers Should Know About California Real Estate Transfer Taxes

As Benjamin Franklin once said, “Nothing in this world can be said to be certain, except death and taxes.” For out-of-state buyers unfamiliar with California’s transfer tax system, there are a few things to know to avoid a surprise tax bill or penalties long after the deal has closed.

When parties agree to convey land via a deed, a title company, acting as escrow agent, typically records the deed and simultaneously pays applicable transfer taxes. However, parties to commercial real estate transactions often structure the sale through the purchase of equity in the entity (most commonly the membership interests in an LLC) that holds title to the land in lieu of a conveyance deed, resulting in a “change in ownership” of the entity.

Under the California Transfer Tax Act, cities and counties are authorized to impose transfer taxes on the transfer of an interest in commercial or residential real property. As a result, most local jurisdictions have enacted ordinances imposing real estate transfer taxes. After years of uncertainty as to whether local transfer taxes applied to equity transfers, in 2017, the California Supreme Court held in 926 North Ardmore Avenue, LLC v. County of Los Angeles that cities and counties may impose transfer taxes on entity transfers that result in a “change in ownership” for purposes of property tax reassessment. Although this particular case focused on a transaction involving the transfer of LLC membership interests, California applies the same “change in ownership” analysis to partnerships and closely held corporations.

While those familiar with California equity purchase transactions may have grown accustomed to the applicability of such real estate transfer taxes following the 926 North Ardmore decision, out-of-state buyers, or parties less familiar with California tax law, may be in for a surprise if they fail to consider the items detailed below:

• Transfer Taxes Due at Time of Transfer. In California, transfer taxes become due and payable when any interest in California real property valued at more than $100 is transferred. Such transfer taxes are due at the time of the transfer regardless of whether the applicable deed or other instrument of transfer is recorded later (or not recorded at all). The amount of the transfer tax can vary by county, but most commonly is levied at a rate of $1.10 per $1,000 of purchase price.

• Change in Control Triggers Transfer Tax. When a person or entity obtains control of more than 50% of the equity in any entity through the purchase or transfer of such equity, the purchase or transfer of that equity is a change of ownership of the real property owned by the entity in which the controlling interest is obtained.

• Change in Ownership Triggers Transfer Tax. Whenever ownership interests representing cumulatively more than 50% of the total interests in an entity are transferred by any of the original co-owners in one or more transactions, a change in ownership of that real property owned by the legal entity has occurred.

• Buyer Files Form BOE-100-B. Buyer must file a Form BOE-100-B with the California Board of Equalization (BOE) when there has been a change in ownership or control of a legal entity that owns real property in California within 90 days of closing. The form notifies the state that a change of ownership or control in the entity that owns the property has occurred, which triggers the BOE to confirm with the county that the transfer tax has been paid.

• Confirm Payment Details with Title Company and Local County Recorder. Although the law requires payment of the transfer tax, some counties may not be familiar with the tax and/or may not have clear protocols for collecting the tax payment in the context of an equity transfer. Additionally, some title companies may not agree to transmit the transfer tax to the county in the absence of a recorded deed. It is good practice to seek guidance on payment logistics from the title company and county recorder in the county where the property is located well in advance of the scheduled closing date in order to avoid eleventh-hour confusion.

Understanding change in ownership and change in control rules in California real estate transactions will allow parties to meet payment and filing deadlines for applicable real estate transfer taxes.

Patrick Abell and Sylvia Arostegui practice in the Real Estate, Development and Construction group at Stoel Rives LLP. Contact Patrick at patrick.abell@stoel.com or Sylvia at sylvia.arostegui@stoel.com for legal guidance on the subject matter of this article or other real estate law matters.